Most practitioners are familiar with the federal sanction powers as codified in the Federal Rules of Civil Procedure (i.e., Rules 11, 26, 30 and 37). However, all federal courts also possess inherent sanction power that is conceivably broader than those articulated under the various Rules.  And, notwithstanding that this is an ESI blog, the Court’s inherent sanction powers are not limited to issues involving electronic discovery.

On April 18, 2017, the Supreme Court of the United States (“SCOTUS”) provided guidance on the breadth of a federal court’s inherent authority to sanction a litigant for bad faith misconduct. Specifically, SCOTUS held in Goodyear Tire & Rubber Co. v. Haeger (137 S. Ct. 1178 (Apr. 18, 2017)), that when a federal court exercises its inherent authority to sanction bad-faith conduct by ordering a litigant to pay the other side’s legal fees, the award cannot be punitive but rather, must be limited to the fees the innocent party incurred solely because of the misconduct.

Relevant Background

In 2003, Leroy, Donna, Barry, and Suzanne Haeger (“Haegers”) were injured when one of the tires on their motorhome failed while they were driving on the highway.  This failure caused the motorhome to overturn. The tire was manufactured by The Goodyear Tire & Rubber Company (“Goodyear”). In 2005, the Haegers sued Goodyear, alleging various actions sounding in product liability. Specifically, the Haegers alleged that the Goodyear G 159 tire was not designed to withstand the level of heat generated when used on a motorhome at highway speed levels. After a protracted discovery period replete with disputes, due in part to Goodyear’s slow response to repeated requests for internal tire testing on the G 159 model, the parties reached a settlement prior to trial.

Over a year later, the Haegers’ attorney learned of relevant information – not previously disclosed during discovery – that was damaging to Goodyear’s defense.  Specifically counsel learned that, in an unrelated lawsuit, Goodyear had disclosed a set of relevant test results which established that the G 159 tire got unusually hot at specific speeds.  The Haegers’ attorney filed with the District Court a motion seeking discovery sanctions arguing that Goodyear committed discovery fraud by knowingly concealing crucial testing information. Goodyear opposed the motion and argued that it never represented that it had provided to the Haegers all of the records reflecting testing conducted on the tire at issue.

The District Court granted the Haergers’ motion, finding that Goodyear’s conduct rose to an “egregious level.” However, because the case had settled, the District Court determined it was not able to impose sanctions, and so, opted, instead, to award the Haegers’ attorney’s fees. In so doing, the District Court recognized that fees must be causally connected to the misconduct, but abandoned that standard, and awarded instead all fees in the case (approximately $2.7million) because the misconduct occurred early on and rose to a “truly egregious level.” * Goodyear appealed arguing that the District Court could not impose such sanctions without the additional procedural protections required for the imposition of punitive sanctions.

On appeal, a divided U.S. Court of Appeals for the Ninth Circuit held that the District Court did not abuse its discretion and affirmed the award finding the District Court’s inherent sanction authority permitted the Court to aware the amount it reasonably deemed the innocent party suffered “during the time” Goodyear acted in bad faith.  Goodyear petitioned the Supreme Court for certiorari review.

The Supreme Court, relying entirely on established precedent, reversed the Ninth Circuit and remanded the case to the District Court. Specifically, SCOTUS found that any imposition of sanctions must be compensatory, and not punitive in nature. While the Court acknowledged Goodyear’s misconduct and the importance of a District Court’s discretion, SCOTUS upheld the established standard that the imposed sanction for bad-faith conduct must be limited to compensate for the misconduct with a documented causal standard, and nothing more. SCOTUS reasoned that a sanction is only compensatory if it is calibrated to the damages caused by the bad-faith acts on which it is based, and a causal link between the bad-acts and the legal fees paid by the bad actor is necessary.**  Because, here, the District Court went beyond established precedent, SCOTUS reversed and remanded to the District Court for review based on the but-for test.

*The District Court also crafted a “contingent” award in the event of reversal, reducing the award to $2 million for fees incurred that were causally linked to the misconduct.

**The Court also reviewed the district court’s “contingent” award, noting that even after conducting a causal analysis, the District Court found that $700,000 of the incurred fees had nothing to do with Goodyear’s misconduct and were fees the Haegers would have incurred irrespective of whether Goodyear acted in bad-faith or not.  The Court declined to determine whether the “contingent” award was appropriate without the benefit of knowing whether the District Court has applied the appropriate “but for” test.

In Hsueh v. N.Y. State Dep’t of Fin. Servs., (No. 15 Civ. 3401 [PAC], 2017 WL 1194706 [S.D.N.Y. Mar. 31, 2017]) the Southern District imposed spoliation sanctions (specifically, an adverse inference) on the plaintiff in a sexual harassment case, because of her intentional deletion of a recorded conversation relevant to her allegations.  While the court deemed the recording ESI, it ultimately concluded the Rule 37(e) applied only to situations where a party failed to take reasonable steps to preserve ESI; not to situations where, as here, a party intentionally deleted relevant information.

Factual Background

Hsueh filed her sexual harassment complaint on May 1, 2015. During her deposition almost a year later (April 20, 2016), plaintiff stated she did not believe she had any recorded conversations relevant to her lawsuit, but it was possible she may have such recordings.  As the deposition continued, however, Hsueh eventually revealed that she had recorded one conversation with a Human Resources representative but later deleted the recording because it was not “worth keeping” and “was not very clear.” She testified she deleted that recording in either December 2015 or January 2016.

A few weeks after Hsueh’s deposition, defendants filed a letter with the Court requesting a pre-motion conference on a proposed motion for spoliation sanctions in connection with Hsueh’s intentional deletion of the recording. Immediately before Plaintiff’s response was to be filed, Plaintiff’s counsel informed the Court that Hsueh provided him with a recording of the deleted conversation, which Plaintiff was able to recover with the help of her husband.  The result – discovery was reopened for 90 days so that Defendants could depose (again) Plaintiff and her husband.  The Court also reserved the right to impose upon Plaintiff the attorney’s fees and the costs incurred by Defendant’s in connection with reopening discovery.

Notwithstanding the additional discovery and depositions, Defendants proceeded with their sanctions motion.

Relying upon the plain language of Rule 37(e), the Court found the Rule 37 inapplicable in the present instance. The Court continued:

“Because Rule 37(e) does not apply, the Court may rely on its inherent power to control litigation in imposing spoliation sanctions. A party seeking an adverse inference instruction based on the destruction of evidence must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. If these elements are established, a district court may, at its discretion, grant an adverse inference jury instruction insofar as such a sanction would serve the threefold purpose of (1) deterring parties from destroying evidence; (2) placing the risk of an erroneous evaluation of the content of the destroyed evidence on the party responsible for its destruction; and (3) restoring the party harmed by the loss of evidence helpful to its case to where the party would have been in the absence of spoliation.”

The Court also rejected Plaintiff’s argument that sanctions were not appropriate because the recording in issue was ultimately produced.*

Thus, having concluded Hsueh’s actions were the result of a culpable mind, rather than inadvertence, the Court exercised its inherent powers, imposed an adverse inference on Plainiff and granted to Defendants its attorneys’ fees and costs incurred in bringing the spoliation motion and in reopening discovery.

*Specifically, the Court concluded the produced recording was incomplete due to a number of factors including the length of the recording, that it cut off in mid-sentence, and Plaintiff’s husband’s concession that he could not be sure the recording was complete.

In Fulton v. Livingston Financial LLC, 2016 WL 3976558 (W.D. Wash. July 25, 2016), U.S. District Judge James L. Robart sanctioned a defense lawyer who “inexcusabl[y]” relied on outdated case law and pre-2015 amendments to Federal Rule of Civil Procedure 26(b) in motion practice before the court.

On April 13, 2015, Plaintiff (Richard Fulton) filed suit against Defendants for allegedly violating the Fair Debt Collection Practice Act (“FDCPA”) 15 U.S.C. § 1692, et seq., and several Washington statutes.

On March 17, 2016 (after the Federal Rules were amended), Defendants moved to either compel discovery or exclude medical evidence presented by Mr. Fulton. Specifically, Defendants argued that Fulton “stated on numerous times since the beginning of this case that he was not seeking recovery for any medical condition, so his medical records and treatment were not in issue.”* Judge Robart found defense counsel’s inference “so unreasonable as to constitute a misrepresentation to the court,” as the plaintiff did seek recovery for emotional distress. Id. at *6, *8. More important to this Blog post, however, was Judge Robart’s finding that defendant’s counsel had “misstate[d] the law” regarding discovery by citing cases analyzing pre-amendment Rule 26. Id. at *7. And further finding, defense counsel proceeded to misstate the law in their reply brief continuing to rely upon case law that existed before the highly publicized amendments that took effect December 1, 2015. Judge Robart declared that such citations to outdated case law were “inexcusable” and “inexplicable.” Id. at *7, *8.

Judge Robart then proceeded to sanction defense counsel in an oral ruling. In addition to awarding Fulton his fees and costs incurred in litigating the motion, Judge Robart ordered defense counsel to provide a copy of his offending motion to the supervising members of his firm, with the explanation that the court had entered sanctions against him “for quoting provisions of the civil rules that are badly out of date, and also making direct misrepresentations to the court.” Id. at *8. Judge Robart also threatened an additional sanction of requiring defense counsel to report this sanction on future pro hac vice applications. Id.

Before determining whether to require counsel to report the sanction on future pro hac applications, defense counsel filed a supplemental memorandum in response to the court’s oral ruling, stating that he had acted in good faith and noting that his conduct did not affect the administration of justice in the case. For these reasons, defense counsel requested that the court exercise its discretion in not taking disciplinary action or, in the alternative, limiting the disciplinary action to an informal, private admonition that would not need to be reported on future pro hac vice applications. Id. As the defense counsel’s memorandum was not denominated a motion for reconsideration, Judge Robart declined to reconsider his oral ruling and instead considered only whether to impose the additional pro hac vice reporting sanction. Id. at *8.

Judge Robart rejected as “post hoc speculation” defense counsel’s claim that because pre-amendment Rule 26 could have applied “insofar as just and practicable,” his citation to pre-amendment cases was in good faith. Id. The court held that by relying on pre-amendment cases in an argument on discoverability and making “no reference to the proportionality requirement,” counsel “misrepresented the scope of discoverable information in a motion to compel or exclude evidence” and then failed to “own[] up to his misrepresentation,” which was “tantamount to bad faith.” Id.

In conclusion, Judge Robart noted that despite [defense counsel’s] flawed efforts to excuse his comportment, the previously issued sanctions (i.e., providing a copy of offending motion to supervising members of firm and awarding plaintiff his fees and costs in litigating this motion) “nearly suffice” to deter counsel from misrepresenting facts or the law in the future and thus decided that counsel did not need to report the sanctions on future pro hac vice applications. Id. Judge Robart did add, however, an additional sanction, requiring counsel to disclose the sanctions imposed if, at any point in the next five years, a federal court threatened or imposed sanctions on him. Id. In Judge Robart’s view, “[t]his requirement will alert courts presiding over future cases that [defense counsel’s] misrepresentations in this case constitute strikes one and two against him. Future courts will then be sufficiently informed to properly sanction any further bad faith by [defense counsel].” Id.

This case serves as an important reminder of our obligations to remain current with and conversant in an organic and evolving body of rules and decisions.

*This conclusion was based on Fulton’s statements that “he did not seek formal medical treatment for stress, worry and inconvenience brought on by Defendants’ conduct.”

 

It is the beginning of a new year and I thought it the ideal time to list out those steps that are absolutely critical when an attorney is confronting his/her obligation to produce e-discovery in connection with a litigation.  Bear in mind, the below list is not exhaustive and each step is replete with technical and tactical sub-steps and decisions.  However, the nine steps below are a useful road map to get started.

  • Assess whether your case involves e-discovery. In today’s technology-laden world where emails are ubiquitous and many of us interface daily with the internet of things, chances are your case will involve e-discovery.
  • Implement (or cause to be implemented) a comprehensive and appropriate ESI preservation protocol.  Remember, it is wise to cast a large net when it comes to preserving data.  That strategy likely changes when it comes time to collect/process data.  Make sure to familiarize yourself with the client’s deletion policies, backup tapes, and shredding procedures.  See next step.  The scope of your hold notice is necessarily informed by your client’s data including its location.
  • Understand the client’s ESI systems and storage.  Remember, data maps can be helpful but are often out of date.
  • Understand (and educate your client about) the various options available for collecting ESI (i.e., self-collection vs retaining a vendor; targeted collection vs robust collection).
  • Identify the various custodians (and meet with/conduct collection interviews of live custodians) who may have potentially relevant ESI and understand the various media on which that ESI resides.
  • Meet and confer with opposing counsel to develop a mutually agreeable discovery plan that addresses common ESI issues including production costs and deduplication methods.
  • Collect ESI (ideally using a vendor especially when the custodians include complex or dynamic databases or servers) in a manner that is defensible and preserves the integrity of the data (for example, do not forensically image the hard drive of a Mac using a tool designed for Windows or run the risk of overwriting the hard drive’s boot sector).
  • Explore ways to minimize the review costs associated with reviewing for production the collected documents.
  • Finally, produce responsive non-privileged ESI in a recognized and appropriate manner.

As discussed in past blog posts, it is critically important for counsel to be involved in each step of the process as the recent case law makes plain that Courts expect counsel to be actively involved in collection/review and production.  Indeed, we have seen a spate of case law from 2016 where the Court imputes a client’s failures on counsel and sanctions both!  Finally, if you feel incapable of handling any of the above steps, get help!  Various ethics opinions (not yet adopted in New York) suggest an attorneys’ duty of competence owed to one’s client includes being competent in matters of ESI.

In Arrowhead Capital Fin. Ltd. v. Seven Arts Entertainment, Inc. 2016 U.S. Dist. LEXIS 126545 (S.D.N.Y. Sept. 16, 2016), District Judge Katherine Polk Failla imposed significant sanctions upon both the Chief Executive Officer (“CEO”) and the lawyer for defendant Seven Arts Entertainment Inc. (“SAE”).

Background

Arrowhead Capital Finance, Ltd. (“Arrowhead”) sued SAE in 2014 seeking to enforce a judgment it had little ability to enforce because all of the assets held by the debtor had been sold to SAE.  SAE filed a motion to dismiss, arguing the Court lacked personal jurisdiction.  The Court denied the motion pending discovery.

In a letter dated September 21, 2015, Plaintiff claimed SAE and its counsel had engaged in various misconduct during discovery.  The violations alleged to have been undertaken to slow down discovery included:

  • SAE inflated their document productions with nonresponsive documents;
  • SAE refused to produce critical responsive documents;
  • SAE’s discovery responses were incomplete and replete with improper objections; and
  • SAE refused to produce key witnesses for deposition.

The Court held a conference to address Arrowhead’s complaints.  During that conference, SAE’s counsel acknowledged he had not reviewed the discovery responses interposed by his client and merely forwarded to his attorney the materials he received from SAE’s CEO.

As a result of this admission, the Court stated it had no confidence SAE would meet its discovery obligations and ordered SAE’s CEO to personally appear to testify concerning the alleged misconduct.  The Court also ordered SAE to produce the responsive documents Arrowhead requested but never received.

Notwithstanding the Court’s various orders, SAE refused to produce witnesses for deposition or produce the required documents.

Because the Court deemed SAE’s CEO to be directing counsel not to comply with the Court’s orders, Arrowhead moved for sanctions.  In response, the CEO testified his offices were “paperless” and the third-party server upon which documents were maintained was destroyed as a result of SAE’s failure to pay its bills (which he claimed was unintentional).  The CEO also cast blame on various staff people to whom he had purportedly delegated the task of complying with the Court’s orders.

The Court concluded SAE was willfully making misrepresentations to the Court and showed “flagrant disregard for” Court orders for the purpose of withholding information from Arrowhead.  As a result, the Court held SAE forfeited its jurisdictional arguments due to non-compliance with Court orders.  The Court further determined a spoliation instruction would be provided in connection with any claims ultimately submitted to the jury.  Defendants’ CEO also was ordered to pay Arrowhead’s costs in association with bringing its various motions and was ordered to retain separate legal counsel to conduct a thorough review of SAE’s files to assess whether additional responsive information remained to be produced.  Defendants’ counsel, who was deemed complicit in the violations,  was ordered to pay a portion of Plaintiff’s costs.

Conclusion

This decision reinforces that counsel may not turn a blind eye to a client’s behavior nor may counsel simply follow the instructions of clients.  Rather, counsel has a duty to ensure that good faith efforts are taken to comply with discovery obligations.  This case also reminds us that the amended Rule 37(e) does not lessen punishments for willful or intentional e-discovery misconduct.  Rather, bad faith behavior will be met with sanctions, not only for the party, but for counsel as well.

On October 4, 2016, District Judge Jon S. Tigar issued an opinion every federal court practitioner should read (Rodman v Safeway, Inc., [11-cv-03003] [N.D. Ca.] [JST]).  The decision serves as an important reminder that counsel has an obligation to assist their client when identifying and collecting  electronic documents responsive to discovery demands.  Indeed, it is not sufficient or defensible to have a non-IT savvy individual search electronic media for responsive materials and to do so without meaningful oversight and involvement of counsel.

The Rodman case is a certified class action for breach of contract.   Defendant, Safeway, Inc. (“Safeway”), entered with customers an online contract that determined pricing and delivery fees associated with online grocery shopping.  The essence of the allegations before the Court were that Safeway breached the contract by charging prices on Safeway.com that were materially different than those charged (for the same items) in the physical store from which the groceries were selected and delivered.

After multiple summary judgment motions, one issue remained for trial: whether class members who registered for the delivery service prior to 2006 agreed to the same contract as class members who registered after 2006?    As a result of this remaining issue, class representative Rodman requested documents showing the terms and conditions and registration process in effect from 2001 through 2005 (“Special Terms”).  On March 9, 2015, Safeway responded to this discovery demand advising that it did not have access to the Special Terms and subsequently reported (on April 7, 2015) that it could not locate any documents responsive to this request.

Seven days before trial, Safeway produced 10 highly responsive documents related to Safeway’s Special Terms.  These documents were found on a “legacy” hard drive and were found by Safeway’s Director of Marketing – Steve Guthrie – when he was prepping for the trial (more than 5 months after discovery closed).   Guthrie – who was designated to testify concerning all steps taken to locate documents and persons knowledgeable about the pre-2006 processes and Special Terms, previously testified that he had searched the legacy hard drive using “key word searches” and did not locate any responsive documents.    

Given the highly relevant nature of the documents produced, the Court continued trial for two months and permitted Plaintiff to take additional discovery.  Eventually, a judgment was entered against Safeway. That judgment is now on appeal before the Ninth Circuit.  

On April 6, 2016, however, and as is relevant to this blog, Rodman filed a motion for discovery sanctions.  Judge Tigar’s decision, granting in part and denying in part the sanction motion, entered on October 4, 2016, imposed a sanction in the amount of $516,484.00 against Safeway.

LEGAL STANDARD FOR DISCOVERY

In reaching its decision, the Court began by reciting the standard under FRCP 26(g) – that a “signing attorney [must] certify that a reasonable inquiry has been made with respect to the factual and legal basis for any discovery request or response.”  The Court further found that when an attorney makes a certification that violates this rule and does so without “substantial justification,” the Court “must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both.” (Rule 26(g)(3)). (emphasis added).

Plaintiff moved for sanctions based upon Safeway’s false statement that no documents responsive to his demand for the pre ’06 Special Terms existed.  Safeway responded that sanctions were not warranted because it made a reasonable inquiry into the basis for its response, including interviewing individuals, and searching the legacy drive for documents.  Safeway argued these steps were comprehensive and thus reasonable.

The Court disagreed and concluded that Safeway’s initial search of the legacy drive was unreasonable for at least three reasons.

First, the Court found “there [was] no indication that Safeway’s counsel guided or monitored Mr. Guthrie’s search of the legacy drive in any significant way.”  Rather, counsel relied on Guthrie’s own determination and seems not to have questioned the thoroughness of Guthrie’s search.  The Court found this “lack of guidance and oversight sufficient to “support” a finding of unreasonableness.”

Second, because there is no evidence that Guthrie had any experience in conducting searches of large document repositories, such as the approximately 300 GB legacy drive, the search was unreasonable.  Indeed, the Court found that Safeway’s counsel could have, but failed to, request a member of Safeway’s IT department (or anyone else familiar with modern e-discovery) conduct the search.

Third, the evidence indicates the search was objectively unreasonable. For example, this was not the case of Safeway being asked to locate the proverbial needle in a haystack.  Rather, many of the electronic file folders (now known to contain the responsive documents) had names like, “Special Terms,”  and “OldSiteDesign” – names that should have signaled to anyone conducting an adequate search that the folder was likely target rich.  Instead, Mr. Guthrie searched for the key words only in a file’s name (rather than in the body of, or content of the file or folder).  This too, shows counsel failed to guide, monitor or inform what Guthrie did.

Clearly if we are to internalize any lesson from this decision it is the obligation of counsel to actively participate in the discovery process.  We cannot allow our client(s)/clients’ employees to collect responsive information in a vacuum.  Rather, we must actively participate in the process and we must secure the expertise of individuals steeped in modern e-discovery when we or client lacks the expertise.  In fashioning the one half-million dollar sanction, the Court found it telling that a substantial part of the legal work Plaintiff sought the cost of performing (additional discovery, unnecessary trial preparation.) would have been avoided had a reasonable search – meaningfully informed by counsel – been conducted on the legacy drive.

 

Federal Rule of Civil Procedure 37 (along with others — Rules 1, 16, 26 and 34) was amended, effective December 1, 2015.

The amendment to Rule 37(e) was intended, in part, to ensure practitioners/litigants were fully aware of their preservation obligations, to ensure a uniformity of sanctions imposed upon parties and practitioners who failed to preserve discoverable electronically stored information (“ESI”), and to make adequate preservation a realistic goal, requiring that only “reasonable steps” be taken to preserve information. Indeed, the amendment requires a finding of intent or bad faith before sanctions can be imposed based upon spoliated information. (*)  Now, nearly a year after the enactment, it appears, from a review of the case law, that the amendment to Rule 37 (e) is effective in achieving its intended purposes.

Not only have federal court decisions involving sanctions declined since Rule 37’s amendment but, practitioners appear to be in better compliance with their preservation obligations since the amendment.

What Do the 2016 Statistics Look Like
Forty-nine federal decisions have cited Rule 37(e) since the Rule was amended. (**) Of these 49 decisions (20 of which did not apply Rule 37), thirteen decisions granted sanctions and sixteen decisions denied sanctions and/or reserved imposing sanctions. And so, sanctions were issued by courts approximately 40% of the time. Interestingly, the nature of the sanctions imposed spanned the gamut and included financial sanctions, adverse inferences, evidence preclusion, or a combination of sanctions. However, the most common sanction issued was an adverse inference.

Indeed, of the 13 decisions that granted sanctions:

• one decision entered a default judgment,
• three decisions precluded reliance upon certain evidence,
• seven decisions imposed monetary sanctions, and
• eight decisions imposed sanctions in the form of adverse inference sanctions. (***)

NB: some decisions imposed more than one type of sanction pursuant to 37(e).

Additionally, there was a variety of “lost” ESI at issue in the various decisions. Specifically,

• Twelve decisions involved unpreserved email data,
• Four decisions involved unpreserved text messages,
• Three decisions involved unpreserved portable device data,
• Two decisions involved unpreserved videos,
• Two decisions involved unpreserved phone call recordings,
• Two decisions involved unpreserved Internet browsing history,
• One decision involved unpreserved social media,
• Twelve decisions involved unpreserved non-email business data.

While 49 federal court decisions, in less than a year, have referenced Rule 37(e), that number is far fewer than in years past. In fact, according to research sources, the number of sanction decisions in 2011 totalled 150; and in 2012 that number was 120. Thus, it would appear that sanction decisions are on the decline. Moreover, given that there are 900 sitting federal judges, one could argue that sanctions have not lightly been sought since the Federal Rules amendments.

FOOTNOTES:

* Although Judge Scheindlin’s Zubulake opinions (which made it explicit that parties have a duty to preserve evidence when litigation is imminent) were authored many years ago, lawyers and parties nonetheless continued to fail to preserve evidence.

** Those 49 cases are:
CAT3, LLC v. Black Lineage, Inc., 2016 WL 154116 (S.D.N.Y. 2016)
O’Berry v. Turner, 2016 WL 1700403 (M.D. Ga., Valdosta Div. 2016)
Matthew Enterprise, Inc. v. Chrysler Group LLC, 2016 WL 2957133 (N.D. Cal. 2016)
GN Netcom, Inc. v. Plantronics, Inc., 2016 WL 3792833 (D. Del. 2016)
Learning Care Group, Inc. v. Armetta, 2016 WL 4191251 (D. Conn. 2016)
Best Payphones, Inc. v. City of New York, 2016 WL 792396 (E.D.N.Y. 2016)
Nuvasive, Inc. v. Madsen Medical, Inc., 2015 WL 305096 (S.D. Cal. 2016)
Thomas v. Butkiewicus, 2016 WL 1718368 (D. Conn 2016)
Ericksen v. Kaplan Higher Education, LLC, 2016 WL 695789 (D. Md. 2016)
BMG Rights Mgmt. (US) LLC v. Cox Comms., Inc., 2016 WL 4224964 (E.D. Va., Alexandria Div., 2016)
Brown Jordan Int’l, Inc. v. Carmicle, 2016 WL 815827 (S.D. Fl. 2016)
Core Laboratories LP v. Spectrum Tracer Services, L.L.C., 2016 WL 879324 (W.D. Okl. 2016)
Internmatch, Inc. v. Nxtbigthing, LLC, 2016 WL 491483 (N.D. Cal. 2016)
Living Color Enterprises, Inc. v. New Era Aquaculture, Ltd., 2016 WL 1105297 (S.D. Fl. 2016)
Marshall v. Dentfirst, P.C., 313 F.R.D. 691 (N.D. Ga., Atl. Div.)
Marten Transport, Ltd. v. Plattform Advertising, Inc., 2016 WL 492743 (D. Kansas 2016)
Saller v. QVC, Inc., 2016 WL 4063411 (E.D. Penn. 2016)
Martinez v. City of Chicago, 2016 WL 3538823 (N.D. Ill., Eastern Div. 2016)
Fiteq Inc. v. Venture Corporation, 2016 WL 1701794 (N.D. Cal. 2016)
Accurso v. Infra-Red Services, Inc., 2016 WL 930686 (E.D. Penn 2016)
United States v. Woodley, 2016 WL 1553583 (E.D. Mich., Southern Div. 2016)
Marquette Transportation Co. Gulf Island, LLC v. Chembulk Westport M/V, 2016 WL 930946 (E.D. La. 2016)
Orchestratehr, Inc. v. Trombetta, 2016 WL 1555784 (N.D. Tex., Dallas Div. 2016)
Thurmond v. Bowman, 2016 WL 1295957 (W.D.N.Y. 2016)
Mazzei v. Money Store, 2016 WL 3902256 (2d Cir. 2016)
Brackett v. Stellar Recovery, Inc., 2016 WL 1321415 (E.D. Tenn., Knoxville 2016)
Bagley v. Yale Univ., 2016 WL 3264141 (D. Conn 2016)
Thomley v. Bennett, 2016 WL 498436 (S.D. Ga., Waycross Div., 2016)
Granados v. Traffic Bar and Restaurant, Inc., 2015 WL 9582430 (S.D.N.Y. 2015)
Dr Distributors, LLC v. 21 Century Smoking, Inc., 2016 WL 4077107 (N.D. Ill., Western Div. 2016)
Henry Schein, Inc. v. Cook, 2016 WL 3212457 (N.D. Cal. 2016)
Bruner v. American Honda Motor Co., 2016 WL 2757401 (S.D. Al., Southern Div. 2016)
In re Bridge Construction Services of Florida, Inc., 2016 WL 2755877 (S.D.N.Y. 2016)
Markey v. Lapolla Industries, Inc., 2015 WL 5027522 (E.D.N.Y. 2015) (Tomlinson, U.S.M.J.)
Dao v. Liberty Life Assurance Co. of Boston, 2016 WL 796095 (N.D. Cal. 2016)
Zbylski v. Douglas County School District, 2015 WL 9583380 (D. Colo. 2016)
Redwind v. Western Union, LLC, 2016 WL 1732871 (D. Or. 2016)
Stinson v. City of New York, 2016 WL 54684 (S.D.N.Y. 2016)
Whitesell Corp. v. Electrolux Home Products, Inc., 2016 WL 1317673 (S.D. Ga., Augusta Div. 2016)
Vay v. Huston, 2016 WL 1408116 (W.D. Penn. 2016)
Hammad v. Dynamo Stadium, LLC, 2015 WL 6965215 (S.D. Tex., Houston Div. 2015)
Official Committee of Unsecured Creditors of Exeter Holdings, Ltd. v. Haltman, 2015 WL 5027899 (E.D.N.Y. 2015) (Tomlinson, U.S.M.J.)
United States v. Woodley, 2016 WL 2731186 (E.D. Mich., Southern Div.)
Grove City Veterinary Service, LLC v. Charter Practices Inter., LLC, 2015 WL 4937393 (D. Or. 2015)
United States v. Safeco Ins. Co. of America, 2016 WL 901608 (D. Idaho 2016)
Coale v. Metro-North Railroad Co., 2016 WL 1441790 (D. Conn. 2016)
Fleming v. Escort, Inc., 2015 WL 5611576 (D. Idaho 2015)
Kissing Camels Surgery Center, LLC v. Centura Health Corp., 2016 WL 277721 (D. Colo. 2016)
McIntosh v. United States, 2016 WL 1274585 (S.D.N.Y. 2016)

*** Of the 19 cases in which sanctions were not granted, the reasons for denying sanctions varied. Indeed, courts declined to impose sanctions because the party “took reasonable steps” to preserve data; party was not harmed by the fact the ESI was missing; there was insufficient evidence of bad faith; and the missing data was “restored through other methods.”

Recently, two separate New York courts (the First Department and the Southern District) issued decisions imposing sanctions upon litigants who failed to comply with preservation obligations.  While a summary of those decisions and hyperlinks to the full decisions follow, attorneys should take heed that it is critical to timely and properly issue litigation hold notices when litigation is reasonably anticipated.   Irrespective of whether we are practicing in State or Federal court, our obligations to preserve potentially relevant information are not to be taken lightly.

Appellate Division, First Department Upholds (and Modifies) Sanctions Imposed by Trial Court Because of Plaintiff’s Failure to Timely Issue Litigation Hold.

This decision, issued on June 28, 2016, by the Appellate Division, First Department discusses what sanctions are appropriate when a party fails to comply with its preservation obligations.  Specifically, before the First Department was an Order of the Supreme Court, New York County (Carol R. Edmead, J.), which granted defendant’s renewed motion for spoliation sanctions, and dismissed plaintiff’s complaint.  The First Department unanimously modified the trial court’s decision to dismiss the complaint and instead awarded defendant an adverse inference charge at trial as to the spoliated evidence.

The factual underpinnings of the lawsuit involve allegations of legal malpractice against defendant Herrick, Feinstein LLP (Herrick) in connection with Herrick’s representation of plaintiff in negotiating a high rise construction loan with a developer.  The loan closed on May 8, 2007.  After a series of mishaps, including permit revocations and a crane collapse at the construction site, plaintiff retained counsel in June 2008 in connection with its potential claims against Herrick.  Thus, plaintiff’s obligation to preserve evidence arose at least as early as June 2008 (i.e., when it reasonably anticipated litigation).  In May 2010 – almost two years later –plaintiff finally issued a litigation hold.  As a result of this 23 month delay, plaintiff’s record destruction policies (including recycling of backup tapes, routine deletion of emails, and erasure of hard drives/email accounts upon an employee’s departure from the firm), went unsuspended until May 2010.  Plaintiff ultimately commenced its malpractice suit in 2011.

In or about June 2014, Herrick filed a motion seeking dismissal of plaintiff’s complaint as a sanction for plaintiff’s failure to preserve evidence. The trial court found plaintiff’s failures constituted ordinary negligence, and granted Herrick’s motion only to the extent of directing that Herrick be entitled to an adverse inference at trial.  Later that summer, plaintiff produced additional documents that identified various other custodians who likely had information relevant to the lawsuit.  Plaintiff claimed that its failure to produce these materials earlier was inadvertent.  In or about January 2015, Herrick moved to renew its spoliation motion, based on the new documents, including the identification of additional custodians, much of whose electronic records had been destroyed by plaintiff, either due to its failure to timely institute a litigation hold, or deliberately.  Plaintiff cross moved for fees.   Upon renewal, the trial court dismissed the complaint, and denied plaintiff’s cross motion for attorneys’ fees and costs.  This appeal ensued.

The First Department found that the motion court properly granted defendant’s renewal motion but held the trial court’s decision to dismiss the complaint as a spoliation sanction was an abuse of discretion.

The Court noted,“[F]ailures which support a finding of gross negligence, when the duty to preserve electronic data has been triggered, include: (1) the failure to issue a written litigation hold []; (2) the failure to identify all of the key players and to ensure that their electronic and other records are preserved; and (3) the failure to cease the deletion of e-mail” (VOOM HD Holdings LLC v EchoStar Satellite, LLC, 93 AD3d 33, 45 [1st Dept 2012]).  Thus, per prior decisional law, the trial court’s determination that plaintiff’s destruction was grossly negligent was upheld.  However, the First Department found dismissal of the complaint an improper sanction.  Specifically, the Court noted dismissal is warranted only where the spoliated evidence constitutes “the sole means” by which the defendant can establish its defense (Alleva v United Parcel Serv., Inc., 112 AD3d 543, 544 [1st Dept 2013]), or where the defense was otherwise “fatally compromised” (Jackson v Whitson’s Food Corp., 130 AD3d 461, 463 [1st Dept 2015]) or defendant is rendered “prejudicially bereft” of its ability to defend as a result of the spoliation (Suazo v Linden Plaza Assoc., L.P., 102 AD3d 570, 571 [1st Dept 2013] [internal quotation marks omitted]).  Because the record before the Appellate Division demonstrated a massive document production and many key witnesses available to testify, an adverse inference charge was appropriate.

The full decision of the First Department can be accessed here: http://www.courts.state.ny.us/reporter/3dseries/2016/2016_05065.htm

The Southern District of New York Imposes Severe Sanctions Upon Village Due to Village’s Failing to Issue a Litigation Hold

In a separate decision from the Southern District, Judge Karas similarly imposed severe sanctions – an adverse inference and more than $40,000 in attorneys’ fees – against the Village of Ponoma for failing to timely issue a litigation hold.  That decision, and my colleagues’ blog about that decision can be read here:

For more on this topic See Facebook Posts And Text Messages Result In Monetary And Other Sanctions Being Imposed Against A Municipality 

 

We all know that it can be damaging to one’s case if a party to a litigation fails to preserve relevant information.  But when, exactly, does one’s duty to preserve (potentially relevant information) arise?  And what type of sanctions are federal courts imposing under the amended federal rules for preservation failures?

When Does One’s Duty to Preserve Arise?

Different jurisdictions have different rules regarding when the duty to preserve arises but the most common standard is once that party “reasonably anticipates litigation.” This standard is well established in the federal courts and is embraced in New York (see, e.g., Voom HD Holdings LLC v EchoStar Satellite, (2010 NY Slip Op 33764(U)).

And, while it can (sometimes) be difficult to pinpoint precisely when one reasonably anticipates litigation, a recent case in the Northern District of California demonstrates one party’s blatant disregard for its obligation to preserve.  Specifically, in Mathew Enter. v. Chrysler Grp. LLC (No. 13-cv-04236-BLF, 2016 U.S. Dist. LEXIS 67561 [N.D. Cal. May 23, 2016]), the plaintiff made no effort to preserve its internal or external emails after threatening the defendant with litigation.  Not only did plaintiff affirmatively change the email system it utilized for its business and did so after threatening Chrysler Group, LLC with a lawsuit, but Mathew Enterprises also failed to notify its database vendor of the litigation it threatened to file against defendant.   As a result, potentially relevant emails continued to be deleted regularly per normal business practice.  Indeed, there was no suspension of the auto-delete functionality used by Mathew Enterprises and no efforts were taken to otherwise maintain the emails.

Resulting Sanctions?

The Chrysler Group, LLC moved for sanctions against the plaintiff for the loss of these potentially relevant emails, highlighting there was no effort made to preserve and urged the court to utilize spoliation sanctions. The judge, Magistrate Judge Paul Grewal, issued FRCP 37(e) sanctions.  Specifically, he expanded the scope of evidence the Chrysler Group, LLC was allowed to bring to trial and he awarded reasonable attorney’s fees.   Moreover, Judge Grewal stated, “[Plaintiff’s] lackadaisical attitude towards document preservation took away [defendant’s] opportunity. Not only has spoliation occurred, but it also has prejudiced [defendant].”

The Mathew Enterprise case is a good reminder that preservation obligations must be taken seriously as the ramifications for failing to preserve can be significant.  It is thus critical that our clients are properly advised of the need to begin preservation efforts as soon as litigation is reasonably anticipated.  (i.e., upon receipt or transmittal of a cease and desist letter, for example).

In a trademark infringement case pending in the Northern District of California (InternMatch v. Nxtbigthing, 2016 WL 491483 [N.D. Cal. Feb. 8, 2016]), plaintiff requested copies of any documents relating to the defendants’ defense that it had continually and pervasively used the trademark at issue.   The defendants were not able to produce many responsive documents and advised plaintiff that a lightning strike in 2011 and a subsequent power surge in April 2015, destroyed responsive documents, including relevant corporate records.  Defendants further noted that after the power surge, they discarded certain laptops and hard drives that were damaged by the event.

Believing defendants intentionally destroyed electronic versions of responsive documents, plaintiff sought sanctions against defendants.  The Court, following the newly amended FRCP 37(e), found defendants violated their duty to preserve relevant evidence.  The Court specifically noted that defendants failed to run diagnostics on the destroyed computer following the power surge to assess whether the files on the laptop’s hard drive could be recovered prior to discarding it.  Defendants failed to take any recovery efforts despite their claim that the only electronic copies of the marketing materials allegedly establishing “previous use” of the trademark existed on that computer. The Court also found the power surge to be an implausible claim. The Court held that “at the very least, [the] defendants consciously disregarded their obligations to preserve relevant evidence,” and granted the plaintiff’s request for an adverse inference instruction sanction.

This case reminds us that under the new Rule 37(e), courts are authorized to use specific measures, including adverse inference sanctions, if relevant information that should have been preserved is lost – irrespective of the mechanism that caused the loss. The decision also serves as a good reminder that electronic information is susceptible to destruction and modifications based upon uncontrollable events — like power surges — and we remain obligated to take prompt preservative/remedial measures upon learning of such events.